Will China PMI mark the end of negative data surprises?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The positive surprise in China`s official reading on the manufacturing sector Thursday is a result of improving business sentiment on the back of Beijing`s recent stimulus announcement, analysts told CNBC.

The government`s Purchasing Managers` Index (PMI), which rose to 50.3 in July from 50.1 in June and beating market expectations of 49.9 according to a Reuters poll, also marks the first sign of stabilization in the world`s second largest economy, they added.

The key 50 threshold demarcates expansion from contraction.

“Since mid-July Premier Li has made it very clear that his government will try to achieve the 7.5 percent growth target with some policy easing measures including more investment in infrastructure fixed asset investment,” Ting Lu, head of Greater China economics at Bank of America Merrill Lynch wrote in a note.

“So the official PMI survey which was conducted late July could be impacted by the more positive sentiment,” he said.

Last week, the government unveiled initiatives to support growth including cutting taxes for some small and micro-sized enterprises and measures to stabilize exports and speed up railway investment.

According to Dariusz Kowalczyk, senior economist and strategist, Asia ex-Japan at Credit Agricole, this could be the end of negative surprises in the country`s economic data.

“This may mark the beginning of a turnaround in sentiment on China,” he said.

The changing sentiment could explain how investors shrugged off a separate private reading of the manufacturing activity, which was also out on Thursday, which showed a different picture of China`s economy.

The HSBC final China PMI fell to an 11-month low of 47.7 in July from 48.2 in June, in line with the flash estimate released last week.

But investors chose to focus on the official figure, pushing the Shanghai Composite up 1.1 percent, and the Hong Kong`s Hang Seng up 0.6 percent.

According to Lu of Bank of America Merrill Lynch, as the economy shifts away from its dependence on exports, more attention should be paid to the official PMI.

“In our view, at this moment we should surely focus on the official PMI simply instead of the HSBC PMI because exports now only contribute 10 percent of China`s GDP,” Lu said.

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Betting on a Tokyo Olympic win? Stocks you may like to own

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Tokyo is one of three cities in the running to host the 2020 Olympic Games and with a vote on the successful country due in September, there are a number of Japanese stocks that could do well if Tokyo wins the bid, says one equity strategist.

Well-known brands such as Canon, advertising firm Dentsu and security company Secom are among the companies that Ben Collett, head of Asian equities at Sunrise Brokers in Hong Kong, recommends investors snap up if they think Tokyo has a good chance of hosting the Games.

Japan`s capital city is going head-to-head with Madrid and Istanbul in the bid to host one of the world`s most famous sporting events, and according to media reports, Tokyo has a narrow edge over its rivals.

“Construction firms have been doing well in anticipation of Tokyo winning the bid and among the other names we think will do well include the big brands that will get exposure from sponsorship deals such as Softbank, Hitachi and Fujitsu ,” said Collett.

He said his firm did not take positions in these companies but had advised clients to buy them.

“We had recommended a short position in Fast Retailing, which we`ve taken off,” he said, referring to the Japanese retailer which runs the Uniqlo fashion chain.

Japan`s blue-chip Nikkei has been the best performing major equity market this year, with gains of about 30 percent.

A mix of aggressive monetary stimulus from the Bank of Japan, brighter economic prospects and a weak yen, have all propelled Japanese shares higher and a successful win for Tokyo in the 2020 Olympic bid could give the market an additional boost.

“There is an expectation that Tokyo will win the Olympic bid so there are a number of stocks you could buy to position for that,” said Collett. “If you have to narrow down the list then I would say Canon, Fast Retailing, Dentsu and Secom.”

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As the world turns, BRICs no longer a slam dunk

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Once the darling of financial markets, the tables appear to have “flipped” for BRIC nations, analysts say, with one market watcher predicting a recession for the economies once famous for their fast growth.

Emerging countries such as Brazil, Russia, India and China, often referred to as the BRICS, have dominated stock markets with stellar gains in the past decade, but their performance year-to-date has been miserable.

Also read: Investor sentiment weak; USD rally to hit EMs: Barclays

Instead, it’s the developed equity markets that have taken the spotlight this year, with many raking in double-digit gains.

“I think we’ve had a really strong bull market in emerging markets for many years. That era has ended and now, we’re going to get a very long bull market in European and American stocks,” said Clem Chambers, CEO of financial services website ADVFN.

“The BRIC story is over and the BRICS will go into recession. Like all things, there’s always a party going on somewhere and the party’s going to be in America and as an off-set, in Europe.”

So far this year, both the Dow Jones Industrial Average and S&P 500 index have notched up gains of over 18 percent. In Europe, London’s FTSE 100 index has rallied 11 percent and the Spanish Ibex is up 3.5 percent.

In contrast, China’s Shanghai Composite is down 12 percent, Brazil’s Bovespa has plunged over 20 percent and the MSCI emerging market index has shed about 10 percent.

According to Shane Oliver, chief economist at AMP Capital, the improving conditions in the developed world are occurring even as headwinds build in the developing world, in what he has identified as a new “secular trend.”

“With the US, Europe and Japan rebuilding after a horrible decade (or two in the case of Japan), the key emerging market countries are looking a bit less bright,” said Oliver said in a note published on Wednesday.

“Risks around the Chinese economy appear to have increased after several years of rapid debt growth,” Oliver wrote, while “India, Brazil and Indonesia appear to be facing a less attractive growth and inflation [outlook].”

South America and Russia, meanwhile, are vulnerable to “the less favorable outlook for commodity prices,” he added.

Oliver stressed that the shift in secular patterns doesn’t signal alarm bells, but should prompt investors to be more selective in their emerging market picks.
“In particular commodity users such as the Asian region are generally more attractive than commodity suppliers such South America and Russia,” he said.

Chambers at ADVFN was more bearish, saying that he expected the investor shift away from the BRICS towards the world’s major economies to be a long-term trend.

“The new long-term trend will be ascending first-world in the same way as the old long term trend was descending first-world and an ascending BRICS. That has flipped now, and you’ll see China under pressure for a long time, India random as usual and Brazil in recession,” he said.

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Tough times for the ‘biggest victim’ in smartphone war

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Taiwanese smartphone maker HTC is the “biggest victim” of the intensifying battle in the premium handset space, said Citi, and going by history, there is little scope for the struggling company to stage a turnaround.

Following the company`s grim earnings announcement on Tuesday, Citi, which has a “sell” recommendation on HTC, cut its 12-month target price on the stock to 97 New Taiwan dollars (USD 3.23), from 134 New Taiwan dollars, previously. The revised target marks 39 percent downside from current levels.

“The overall high-end demand slowdown forced Samsung to get more aggressive on marketing dollars, which in turn forced other vendors such as Sony and LG to follow. However, HTC, constrained by more limited resources, was not able to follow, which makes [it] the biggest victim of high-end demand weakness,” Kevin Chang, analyst at Citi, wrote in a note published late Tuesday.

HTC shares traded limit-down on Wednesday, plunging almost 7 percent, on concerns over the company`s profitability after it warned a day earlier that it expects to post its first operating loss in the July-September quarter. The company said its operating margin in the third quarter may shrink to between zero and negative 8 percent, from 1.5 percent in the previous quarter.

HTC reported an 83 percent year-on-year drop in profit for the second quarter to 1.2 billion New Taiwan dollars.

Citi says HTC, which was a leader in Android smartphone sales in the US just a few years ago, will struggle to reverse its fortunes given rising competition among smartphone players and pressure to get more aggressive on pricing.

“Historically, we have not seen a handset company stage a successful comeback. Sony is probably the closest, and it took them around 5 years. Nokia, Blackberry, Motorola and LG are all still struggling,” Chang said.

“With high-end demand slowing and Apple`s big-screen iPhone likely in mid-2014, next year could be even tougher,” he added.

Citi was not the only bank to slash its target for the stock. Nomura, albeit less pessimistic on the company`s prospects, reduced its target price to 135 New Taiwan dollars from 180 New Taiwan dollars, saying that it was not convinced that the company`s new mid-tier products would help its margins. HTC has recently stepped up its focus on the mid-to-low cost segment, unveiling last month the Desire 200 – a smartphone targeted at price-sensitive consumers.

HTC shares have plummeted 47 percent year-to-date, compared to shares of rivals Samsung and Apple which have declined 16 and 15 percent, respectively, over the same period.

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Here’s what it means to be a middle class consumer

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The middle class: they are the world`s biggest consumer group and their growing spending power should push global consumer spending up by nearly a third by 2020, according to market research firm Euromonitor.

So, what does it mean to be a middle class consumer?

A study released this week by Euromonitor defined “middle class” consumers as those with a household income in the range of 50 percent below a country`s average annual gross household income and 100 percent above a country`s average.

While consumer spending in developed markets grew by 2.6 percent annually in the five years to 2012 and should remain low through 2018, emerging markets consumer spending saw double-digit growth of 10.4 percent annually in the same period, Euromonitor said in its survey of 6,600 middle-class consumers in 16 developed and emerging markets.

“The past few decades have seen explosive growth in the middle class in emerging markets, as shoppers with new levels of disposable income are ready to spend and are optimistic about their future,” the study said.

About 26 percent of respondents in emerging markets said they intend to increase their overall spending in the next 12 months, while only about half that percentage plan to do the same in developed markets.

Most developed countries have been hurt by weak economic growth in recent years, prompting a change in shopping habits among the middle class, Euromonitor said.

“Regionally, the middle class in the US and Asia-Pacific are prioritizing savings most strongly at 50 percent plus. At the same time, Asia-Pacific respondents are twice as likely as the middle class in other regions to plan to increase their overall spending – 30 percent versus less than 15 percent,” Euromonitor said.

Key trend

One key trend among today`s middle class consumer is that they are “overwhelmingly” well-educated and higher studies are a key priority among the group, Euromonitor said.

“Nearly two thirds report holding at least a bachelor`s degree, if not higher levels of education at 19 percent, especially in emerging markets,” Euromonitor said. “Along with high levels of education, the majority of middle class consumers at 55 percent hold a full-time job, working at least 35 hours per week. Another 15 percent are self-employed.”

An increase in disposable income from higher education leading to well-paying jobs has left middle class consumers with “with enough income to spend on necessities and more left over to spend on small and large indulgences alike,” the report said.

Spending priorities

Holiday travel topped the list of middle-class spending priorities in the next 12 months.

According to the survey, 50 percent of respondents cited travel as a top spending priority, compared with 40 percent who cited savings and 30 percent that listed apparel.

Other spending priorities include money spent on a vehicle and paying down debt, at 28 and 27 percent respectively.

“Two or more automobiles are typical in Australia, France, Mexico, Spain and the US, while the majority of middle class households in China, Japan, Russia and Turkey own only one car,” Euromonitor said.

Consumer electronics are also a key area of spending for many middle class homes, especially those of “millennials” – born after 1980, the research firm said.

Watching television, browsing online and emailing are among the top five activities in middle class homes. More than 20 percent of middle-class consumers said they planned to spend on electronics in the next 12 months, Euromonitor said.

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Here’s what could really knock the yen back down

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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As Japan`s yen continued to strengthen against the dollar this week, some analysts suggested that further monetary stimulus from the Bank of Japan was needed to put the currency back on its downward track.

The yen was trading at 97.94 per dollar late on Tuesday, hovering near a one-month peak hit on Monday. It is up more than 3.5 percent from a high hit earlier in July.

“The price action on dollar/yen has been a bit worrying and this is looking a little bit like catching a falling knife,” Sean Callow, senior currency strategist at Westpac, told CNBC.

Aggressive monetary easing and optimism about Japan`s economic outlook have helped drive the yen lower against the dollar this year. Its weakness is a central part of Prime Minister Shinzo Abe`s plans to revive the Japanese economy, which has been held back by two decades of deflation.

But some analysts warned that Abe`s economic policies have helped push the Japanese currency back up against the dollar in recent weeks, and that strength has dealt a blow to Japanese stocks. They said that if Japan`s policymakers are serious about delivering a weak yen, then they may have to step up their monetary stimulus efforts.

“Firmer data is being misinterpreted as a sign that the Bank of Japan (BOJ) won`t do any more stimulus. We think it will have to, and that should help weaken the yen,” said Mizuho Corporate Bank Market Economist Vishnu Varathan.

While the general tone of recent Japanese data has pointed to a pick-up in the economy, there have been some signs of weakness. Data on Tuesday for instance showed industrial output fell by a bigger-than-expected 3.3 percent in June, month-on-month, while household spending for the month fell 2 percent, despite expectations for a rise.

“The industrial production report is not good news for Abenomics, however it does suggest the BOJ will need to put its foot down slightly firmer on the easing peddle,” Chris Weston, chief markets strategist at trading firm IG, said in a note. Abenomics is the term now widely used to describe Abe`s radical economic policies.

According to Callow, it might be some time yet before the BOJ gives any more indication of its plans for Japanese monetary policy. The central bank in April said it would pump USD 1.4 trillion into the economy by the end of 2014 to help Japan get back on its feet.

“The Bank of Japan is pretty happy with the way the numbers are stacking up for the most part, and it needs more time, and I don`t think we`re going to get an exciting BOJ meeting until October, when it releases its semi-annual report,” said Callow.

Currency strategists are standing by their forecasts for a weakening in the yen long-term, especially amid signs Japanese investors are stepping up their buying of foreign assets.

“As long as data can stabilize and outflows out of Japan continue, the yen should head lower,” Callow said.

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Official data to signal more pain for Chinese factories

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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China’s closely-watched official manufacturing purchasing managers index (PMI), due out on Thursday, is expected to show factory activity contracted for the first time in 10 months as the world’s second largest economy suffers a deepening slowdown.

The government’s official PMI, which tracks large and state-owned firms, is forecast to fall below the key 50 threshold that demarcates expansion from contraction to between 49.2 and 49.8 in July, according to four economists polled by CNBC. The PMI stood at 50.1 in June.

“Businesses in China are increasingly cautious on the growth outlook, and this is being driven by a lot of factors: the perception that the government will allow weaker growth, the strong currency, deteriorating financing conditions and policies to curb excessive consumption of high-end products and services by government officials,” said Dariusz Kowalczyk, senior economist, Asia ex-Japan at Credit Agricole.

“The official PMI will reflect this and we expect manufacturing to slow for the remainder of the year,” he added.

A key drag on the manufacturing sector is tighter liquidity conditions, say economists, which is making it more difficult for businesses, particularly small and medium sized enterprises (SMEs), to raise working capital to invest and fund their operations.

This could explain why the official index has lagged HSBC’s China PMI – which focuses more on SMEs and has been in contractionary territory for three straight months. The bank’s flash estimate of the index for July fell to an 11-month low of 47.7 from 48.2 in June.

“Given that the small-and-medium sized enterprises are prominently represented in the HSBC sample and they are more affected by liquidity squeezes, the slide in the official PMI should be more moderate,” said Societe Generale in a note released earlier this week.

There have been some concerns that the tight credit conditions suffered by local lenders in June could spill over into the broader economy, contributing to a further slowdown in economic growth.

The manufacturing sector is expected to remain under pressure in the coming months as Beijing seeks to cut back on production in a range of sectors suffering from overcapacity.

Last week, the government ordered hundreds of companies in 19 industries ranging from steel to cement and glass to cut production capacity.

“This shows the government is serious in its efforts to restructure the economy and is prepared to tolerate the necessary pain,” said Zhiwei Zhang, chief China economist at Nomura. “This reinforces our view that growth should trend down, dropping to 7.4 percent in the third quarter and 7.2 percent in the fourth quarter.”

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

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Facebook nearing its IPO price. Here’s why

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Fourteen and a half months after its disastrous initial public offering, Facebook came within four cents Tuesday of its IPO USD 38 mark. Why now?

1. Mobile Games Publishing, a program Facebook announced Monday that will help small and midsize developers distribute their games.

Though just a pilot program, Mobile Games illustrates steps Facebook is taking to generate revenue from areas outside advertising. Taking a cut of partners’ gaming revenue, the company will deliver targeted ads, analytics tools and the ability to work with Facebook’s gaming department.

In its blog announcing the news, Facebook said, “We are invested in the success of these games, and in exchange for a revenue share, we will be collaborating deeply with developers in our program by helping them attract high-quality long-term players for their games. We’ll also be sharing analytics tools and the expertise we’ve gained from helping games grow on our platform for more than six years.”

2. Earnings results weren’t just better than expected but show Facebook executing in all the major areas about which Wall Street has been nervous. Revenue growth is accelerating, and the company is generating more money from its mobile users than expected. It also disclosed some impressive numbers on its ad campaigns’ return-on-investment.

Perhaps most important, CEO Mark Zuckerberg didn’t hesitate to address widespread concerns.

And investors took note of the fact that Facebook’s upside surprise stands in sharp contrast to Google’s disappointing results, indicating that the former’s social and mobile ads are gaining more traction.

3. Analysts have been speculating that Facebook will be added to the S&P 500 index within the next year, which would significantly broaden the company’s investor base.

Stifel Nicolaus analyst Jordan Rohan noted that such a move would have Facebook following in the footsteps of Google, which was added 18 months after its IPO.

After coming within pennies of the IPO price, Facebook shares closed Monday at USD 37.63 on the Nasdaq Stock Market. What’s the stock doing now? Click here for the latest quote.

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—By CNBC’s Julia Boorstin. Follow her on Twitter:

    @JBoorstin

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Zombie economy overshadows Fed meeting

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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GDP data Wednesday is expected to show a slow-moving, zombie-like economy, as the Fed meets for a second day.

Many economists expect second quarter growth to be paltry, less than one percent, and some think that data could help shape the Fed’s thinking if it’s even weaker than expected. The first quarter grew at a 1.8 percent rate.

The Fed meanwhile, is not expected to say much new when its meeting ends. The 2 p.m. statement is not seen altering what Fed Chairman Ben Bernanke has already said about the Fed’s plans to taper bond purchases before the end of the year. But it may adjust its comments to reflect a temporary slowing of the economy. The Fed, and many economists, expect a stronger growth rate in the second half of the year.

“Tomorrow is an action-packed today. It’s one of those weird ones where it’s so action-packed, what if it is a dud?” said George Goncalves, Treasury strategist at Nomura Americas. “We have all these high expectations – GDP, revisions to GDP, ADP, the Treasury going to announce at 8:30 their intentions for borrowing. We have the Fed later on.”

 It is also the end of the month, and that could make markets more volatile as traders square positions. For July, the S&P 500 is up five percent, bringing its year to date gain to 18.2 percent, The Dow was up four percent in July so far. Markets Tuesday were in a wait-and-see mode ahead of the Fed’s announcement Wednesday. The Dow edged 1 point lower to 15,520 and the S&P 500 rose less than a point to 1685.

The 10-year Treasury note was at 2.61 percent Wednesday. Traders are watching that yield level, as a move higher could take the market to a potential nervous zone for stocks.

“We’ve had a little bit of a backup in yields. It (month end) could amplify whatever’s happening toward the end of the day,” Goncalves said.

 “I think GDP will be constructive. I think it’s still coming in on the weak side. The Fed will react to it by not being too hawkish. Then we’re going to quickly turn our attention to the NFP (nonfarm payrolls) on Friday,” he said. The Fed has said it would base its tapering decisions on economic data , and it is particularly focused on employment so some traders expect to get more new information from the jobs data than the Fed statement.

The 8:30 a.m. ET GDP release is also be important because the government will release revisions in the data going back to 1929. It last issued massive revisions in 2009. “It’s clear the level of GDP is going to be higher by a substantial amount, maybe 3 percent,” said Goldman Sachs Chief U.S. Economist Jan Hatzius.

 The revisions are expected to boost the level of GDP but not necessarily change the growth rate of GDP in recent years. “We’re at 0.6 percent,” for the second quarter, said Hatzius.

The revisions will include a new method to count research and development spending as a form of investment spending. Spending by entertainment and media companies on movies and certain other entertainment will now be considered investing in intellectual property. The revisions also include additional source data and recalculate seasonal adjustments.

 J.P. Morgan Chief U.S. Economist Michael Feroli said expects the Fed to be vague about the timing of its plans to taper back the $85 billion in monthly bond purchases. He expects the Fed to begin to move in September and start by cutting purchases by $20 billion a month in mortgage securities and Treasurys.

“To the extent we’re right, that it is going to come in a very soft Q2 number, the Fed’s known for a while. Even when Bernanke went before Congress and testified. He knew the Q2 print would be very bad and he didn’t do anything to soften expectations for tapering later this year,” said Feroli. J.P. Morgan expects second quarter growth of a half percent, but Feroli sees a pickup in the second half other year to 2.5 percent.

Feroli said the Fed could give a nod to the softer data. “I think they’ll be able to ascribe some of it to transitory factors such as fiscal drag,” he said.

There is some expectation the revised GDP data could help explain why GDP has been lagging other data for the last couple of quarters, especially the employment data. Other releases Wednesday include ADP’s private sector payroll data at 8:15 a.m., and that number is expected to be around 183,000, down from 189,000 last time. That number is seen as a sort of precursor to Friday’s July jobs report, expected to show 184,000 payrolls. The Treasury is also expected to announce the auction sizes for its next fiscal quarter at 8:30 a.m.

There is some talk the Fed may change its target of 6.5 percent unemployment for an area to begin to move short term rates, down to six percent. However, some economists think the Fed will wait for a later meeting to make any adjustments. Unemployment, at 7.6 percent last month, is expected to fall to 7.5 percent in July.

 “Our view is it’s steady as she goes for a lot of things. Now is not the time for the Fed to be doing anything, but just clarifying stuff,” Goncalves said. “If ADP is bad, and it’s followed by weak GDP , they could sound very dovish for sure.” He and others say the Fed could choose to taper back a smaller amount in September if the data does not pick up.

There is also a blast of early earnings news, including reports from AB Inbev, Comcast (CNBC’s parent), Diageo, Honda, MasterCard, Energen, Talisman Energy, Southern Co, Humana, Delphia Automotive, Booze Allen Hamilton, Sodastream, Hudson City Bancorp, LPL Financial, Alcatel-Lucent, PG&E, Hess, Exelon and Garmin.

After the closing bell, reports are expected from Allstate, CBC, MetLife, Dreamworks Animation, Whole Foods, Marriott, Suncor Energy, Shutterfly, Trulia, Questar, Cabot, Murphy Oil, Lam Research and Yelp.

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

China acts to ease credit crunch, why the change of heart?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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China`s central bank on Tuesday did something it hasn`t done in five months: it actively injected cash into local money markets, easing concerns of a repeat of the credit squeeze last month that sparked panic in global markets.

The People`s Bank of China (PBOC ) pumped in 17 billion yuan (USD2.7 billion) into the money markets via seven-day reverse bond repurchase agreements. It was the first time the central bank has participated in open money-market operations since June 20 and the first time it has injected funds since early February.

“I see the levels [of the repo operation] more as a shift in the PBOC`s stance to actively managing money market conditions to avoid a re-run of the liquidity squeeze in June,” Societe Generale economist Wee-Khoon Chong said in a note.

“[It] could also serve as a signal that the era of ultra-loose and easy money is over and liquidity has to be appropriately priced (with some leeway of course),” he added.

Analysts said the central bank was motivated to act after the benchmark seven-day repurchase rate spiked to 5 percent on Tuesday for a second straight session following a jump to 4 percent on Friday. It was just below 5 percent on Tuesday, edging down after the injection of funds by the PBOC.

“The central bank reacted to the excessively tight money market conditions – a signal that monetary policy wants to support growth. This is positive for Chinese equities and bonds,” said Dariusz Kowalczyk, senior economist for Asia ex-Japan at Credit Agricole.

Banking stocks certainly cheered the news. Mid-sized lender China Merchants Bank led gains by 2 percent while China Minsheng Banking and Pudong Development Bank rallied over 1 percent in Shanghai, outperforming a 0.7 percent gain in the broader market, and after tumbling as much as 3 percent on Monday.

All about stability

Tuesday`s cash injection left traders wondering why the PBOC was acting now, when it chose not to ease tight credit conditions a month ago. Money markets rates spiked to record levels in June , with the central bank choosing not to alleviate tight credit conditions in a bid to force local lenders to rein in rampant credit growth.

But fears that the credit squeeze could spillover into the broader economy and accelerate a slowdown in the world`s second largest economy sparked panic that hit equity markets globally.

Kowalczyk said Tuesday`s move by the PBOC was also aimed at stabilizing liquidity conditions amid increased capital outflows.

Data from the central bank last week showed that foreign exchange purchases by financial institutions – a major indicator of capital flows – fell USD 6.6 billion in June.

“Corporate clients have been sending more dollars abroad than they received, which is a game changer for money markets because inflows have been a key focus of liquidity,” said Kowalczyk. “Now that it`s reversed, conditions have tightened. And now, the PBOC is just trying to provide substantial liquidity.”

More intervention?

Tuesday`s money market operations sparked hopes of further cash injections by the PBOC.

“We continue to see the central bank stepping up liquidity injections into August, given the sharp decline in the oncoming liquidity trajectory,” said Steve Wang, chief China economist at Reorient Research.

However, the likelihood of future cash injections is likely to depend on the pace of outflows and whether money market rates decline on their own, analysts said.

“It is not an easy task to engineer major market reforms with minimal volatility. Maintaining relatively stable money market conditions is a way forward,” said Societe Generale`s Chong.

Copyright 2011 cnbc.com

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow